Romania Monetary Policy November 2017

At its monetary policy meeting on 7 November, the National Bank of Romania (NBR) decided to keep the policy rate unchanged at 1.75%, where it has remained since May 2015. The decision was in line with market expectations. The NBR also left the reserve requirement on both leu- and foreign- currency denominated liabilities unchanged. Moreover, the Bank decided to further narrow the interest-rate liquidity corridor for the standing facilities to plus or minus 1.00 percentage point (October: plus or minus 1.25 percentage points). As a result, the deposit facility rate increased to 0.75%, while the NBR lending facility (Lombard) rate was lowered to 2.75%.

The decision came as figures for inflation and core inflation were higher than expected in September; however, headline inflation now lies within the Bank’s target bank of 1.5–3.5%. Inflation in September was driven by higher food and oil prices. The NBR also revised its inflation forecasts up at the November meeting and now foresees inflation rising significantly in the short-term, spiking in Q1 2018 before easing towards the end of 2018. A full quarterly inflation report is expected to be released on 9 November. The Bank also noted that revised Q2 GDP data showed stronger-than-previously-recorded growth, mainly due to robust private consumption, which was fueled by wage and fiscal policies. However, the net contribution to growth of exports was negative in the second estimate.

The NBR stated that risks to the outlook largely stem from uncertainties revolving around the 2018 government budget and the government’s current fiscal and income policy stance. Increasing price pressures from higher administered prices for gas and electricity, as well as higher food prices, are expected to push up inflation. The Bank again stated that uncertainties in economic growth in the Euro area and the decisions by the ECB and the Fed were the main external risks to projected growth. That said, the NBR decided to keep its policy rate accommodative to encourage inflation to rise closer to its target rate of 2.5%.

As monetary conditions in October were tighter due to the upward adjustment in interbank money market rates and a slight appreciation in the leu against the euro, the Bank decided to further narrow the interest-rate corridor to halt a further rise in the interbank interest rates and improve liquidity conditions. The tighter corridor could be a sign that the Bank may raise the policy rate at its next meeting in early 2018, although the communiqué did not provide guidance on the NBR’s next move.

The next monetary policy meeting is scheduled for 8 January 2018.

FocusEconomics Consensus Forecast panelists expect the policy rate to end 2018 at 2.71%. For 2019, the panel sees the rate closing the year at 3.38%.

A second estimate released on 7 December by the Statistical Institute (INSSE) confirmed that the economy expanded 4.3% over the same period of 2017 in the third quarter, slightly above the second quarter’s 4.1% expansion.

According to a preliminary estimate released by the National Institute of Statistics on 14 November, the economy expanded 4.3% in the third quarter over the same period last year, gradually accelerating from the second quarter (Q2: +4.1% year-on-year).
Although a breakdown by components is not yet available, tightening labor market conditions and some moderation in inflation suggest household spending expanded at a healthy pace in the quarter.

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